Protecting senior investors from financial exploitation is an important responsibility for everyone in the financial services industry. I have no objection to reasonable safeguards designed to stop scams, theft, coercion, or the exploitation of someone who is genuinely unable to protect himself or herself.

But there is another side of investor protection that deserves just as much attention: protecting a competent adult’s right to control his or her own money.

That is why a recent FINRA proposal troubles me.

FINRA is considering a substantial expansion of Rule 2165, which permits brokerage firms to temporarily hold certain transactions or disbursements when they reasonably believe a “Specified Adult” is being financially exploited. FINRA’s definition automatically includes individuals age 65 and older, as well as certain younger adults whom a firm reasonably believes have an impairment that prevents them from protecting their own interests.

The current rule generally allows a firm-initiated hold for as long as 55 business days under specified conditions. FINRA is now proposing to increase that maximum to 145 business days, through additional 30-business-day extensions.

Think about that for a moment.

One hundred forty-five business days is roughly six and a half months.

In my opinion, when we are talking about restricting someone’s ability to control his or her own assets for that length of time, we need to be extremely careful.

A Rule Created for a Good Reason

I want to be very clear about something: financial exploitation of seniors is real.

Scammers target older Americans. Family members sometimes take advantage of parents and grandparents. People misuse powers of attorney. Vulnerable adults can be manipulated into transferring assets they spent a lifetime accumulating.

A financial professional who sees credible evidence that an elderly client is about to send his life savings to a scammer should have some ability to intervene.

That is the purpose behind Rule 2165, and it is a worthwhile purpose.

Under the existing rule, a brokerage firm must have a reasonable belief that financial exploitation has occurred, is occurring, has been attempted, or will be attempted before using the rule’s safe harbor to place a temporary hold. The firm must also notify appropriate parties, generally within two business days, and immediately begin an internal review.

Those are meaningful safeguards.

My concern is not with the existence of the rule.

My concern is how long we are willing to allow a private financial institution to interfere with a person’s control of his or her property without requiring stronger independent review.

Consider a Different Kind of Elder-Abuse Scenario

Suppose a 75-year-old parent is perfectly capable of handling his financial affairs.

Perhaps he has decided to change financial advisors. Maybe he wants to alter his estate plan. Perhaps he has decided that one of his children will receive less of his estate than that child expected.

Now imagine that a disgruntled adult child contacts the parent’s brokerage firm.

The child tells the firm:

“Dad is developing dementia. He’s making irrational financial decisions. Someone is influencing him. We’re concerned about his money, and we’re considering seeking guardianship.”

Maybe the allegations are true.

But what if they aren’t?

What if Dad is simply making decisions the child doesn’t like?

That distinction is enormously important.

Being 75 years old does not make someone incompetent.

Changing financial advisors does not demonstrate dementia.

Changing an estate plan does not establish undue influence.

And refusing to do what an adult child wants does not mean someone has lost the capacity to make financial decisions.

Yet once an allegation of exploitation enters the system, a financial institution faces a difficult decision. If it allows a questionable transfer to proceed and the client actually is being exploited, the financial consequences could be devastating.

The understandable temptation may therefore be to err on the side of placing a hold.

That is precisely why the length of that hold matters.

Six Months Can Change Everything

A short emergency hold gives everyone time to determine what is happening.

A potential 145-business-day restriction is something very different.

During six-plus months, a family dispute can become a legal dispute.

A child could seek guardianship or conservatorship. Adult Protective Services could become involved. Attorneys could be retained. Evaluations could be requested. Court proceedings could begin.

And something potentially dangerous can happen.

The brokerage firm’s concern may lend credibility to the family member’s allegation, while the family member’s allegation helped create the brokerage firm’s concern in the first place.

That creates the possibility of a feedback loop:

An allegation creates concern.
Concern produces a financial hold.
The hold makes the allegation appear more credible.
The resulting investigation becomes evidence that “something must be wrong.”

Meanwhile, the competent senior may find himself having to prove that he is capable of managing money that was his all along.

That possibility should concern anyone who values both investor protection and individual autonomy.

There Is Another Important Detail

FINRA’s existing guidance already recognizes that holds should not be indiscriminate.

When the questionable activity concerns only part of an account, FINRA says firms should not simply place a blanket hold on everything. Each transaction or disbursement should be evaluated separately, and legitimate disbursements should continue where there is no reasonable belief of exploitation.

That is an important protection.

There is also an existing mechanism for extending a hold beyond the normal maximum. FINRA states that a state agency, such as Adult Protective Services or another appropriate regulator or agency, may ask a firm to extend a hold—and the agency’s request does not necessarily require a formal order.

That makes me even more hesitant about dramatically expanding the firm’s own permitted holding period.

Where Is the Evidence?

FINRA has explained that people involved in financial-exploitation investigations have reported that the existing 55-business-day period can sometimes be insufficient for authorities to complete their work.

I don’t dismiss that concern.

But before we nearly triple the maximum period—from 55 business days to 145—I believe we should demand substantial evidence showing that such a dramatic increase is necessary and that the protections against misuse are adequate.

In fact, FINRA itself specifically asked commenters whether the proposed 145-business-day maximum is appropriate, whether it should be shorter or longer, and whether the proposed extension conditions are sufficiently balanced.

There isn’t universal agreement on the answer. For example, SIFMA has supported the longer period, arguing that investigations involving Adult Protective Services, law enforcement, and other agencies can take substantial time.

That deserves consideration.

But so does the other side of the equation.

How many legitimate transactions have been stopped under Rule 2165?

How often have allegations ultimately proved unfounded?

How frequently have family disputes triggered these investigations?

How often has a competent senior been prevented from transferring an account or changing financial professionals?

What meaningful avenue does a client have to challenge a prolonged hold quickly?

And what standard of independent evidence should be required as a hold becomes longer?

Before granting substantially greater authority to restrict an individual’s access to his or her property, I believe we need much more history, data, and review.

Protection Should Become More Rigorous as the Hold Gets Longer

There is a fundamental difference between an emergency intervention and a long-term restriction.

If a broker sees an 82-year-old client preparing to wire $500,000 to someone claiming to be from the IRS, stopping the transaction temporarily while the situation is investigated makes perfect sense.

But after 30 days? Sixty days? Ninety days? One hundred forty-five business days?

At some point, “we reasonably believe something may be wrong” should no longer be enough.

As the restriction becomes longer, I believe the evidentiary standard should become higher and independent oversight should become stronger.

Perhaps a brokerage firm should be able to initiate a short emergency hold based upon reasonable belief.

But before that restriction can continue for months, I believe there should be meaningful involvement by an independent governmental authority or court—and more than simply an open investigation or informal request to continue waiting.

The longer someone is deprived of control over his or her property, the stronger the justification should have to become.

Protect Seniors—Including From Unnecessary Loss of Independence

There is an irony here that shouldn’t be overlooked.

We rightly worry about someone taking financial control away from an elderly person.

But in trying to prevent that very harm, we must be careful that our regulatory system does not make it too easy to take financial control away from a competent elderly person.

Age should not diminish someone’s presumption of competence.

A 70-, 80-, or 90-year-old American who remains capable of making financial decisions should retain the same fundamental right to make those decisions—including decisions that a child, financial professional, or institution believes are unwise.

People have the right to make financial decisions we disagree with.

They even have the right to make bad financial decisions.

Protecting someone from theft, fraud and coercion is not the same thing as protecting someone from his or her own choices.

That distinction matters.

I support FINRA’s objective of protecting vulnerable investors. I support reasonable temporary holds when credible evidence indicates financial exploitation may be occurring.

But increasing a potential firm-initiated restriction from 55 business days to 145 business days is a major expansion, and I believe it deserves far more historical analysis, empirical evidence, consideration of unintended consequences, and safeguards for competent investors before it is implemented.

Protecting vulnerable seniors is important. Protecting the financial independence and due-process interests of competent seniors is important, too. We should be able to accomplish both.

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Mike Mickels is the President and Chief Compliance Officer of CochranMickels Retirement Specialists, LLC, and an avid sporting clay competitor. Investment advisory services are offered through CochranMickels Retirement Specialists, LLC., a state-registered investment advisor firm domiciled in Alabama and also registered in Florida. Our firm provides personalized planning and investment services to individuals approaching and in retirement.

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